Why CalSTRS is placing many energy transition investments outside the infra bucket

The California State Teachers’ Retirement System is seeking to grow its Sustainable Investment and Stewardship Strategies private investment portfolio to 1 percent of its $327 billion AUM over the next two to three years, to roughly $3.3 billion, Kirsty Jenkinson, the director of SISS for CalSTRS, told affiliate title Infrastructure Investor. The allocation will include a number of infrastructure energy transition investments.

The latest of such to join the portfolio’s ranks is Generate Capital, the investor and operator of energy transition assets founded by Scott Jacobs, Matan Friedman and Jigar Shah in 2014. CalSTRS was part of a $1.5 billion capital raise by the company last month that also included fellow new investor Hesta, as well as Hesta’s compatriots and existing Generate investors QIC and AustralianSuper. Generate has now raised $10 billion from investors over the last 10 years, it said in a statement.

Other investments from CalSTRS through the SISS include an investment in Just Climate, as well as Blackstone’s Green Private Credit Fund III and Ares Management’s Ares Climate Infrastructure Partners Fund II. Thus far, the strategy has committed about $2 billion to investment partners over the past two years.

The SISS strategy started out with a solely public market focus but expanded into private markets in 2021. It sits within CalSTRS’ “innovative strategies” portfolio – meaning it’s not a separate asset class, but a separate allocation within CalSTRS’ entire portfolio. That ‘innovative strategies’ portfolio currently makes up 2.5 percent of CalSTRS’ AUM, or about $8.2 billion.

“We’ve traditionally used [the innovative strategies portfolio] to house and incubate new ideas; areas that we want to scale and potentially graduate to other asset classes,” explained Jenkinson.

For example, there was previously a risk mitigation strategy to help manage downturns within the market. It used to be housed in the innovative strategies portfolio but is now its own asset class, with a 9 to 10 percent allocation of CalSTRS’ entire portfolio.

“The goal of the SISS private portfolio is that it’s a dedicated platform to allow CalSTRS to invest in what we see as an increasingly interesting mix of opportunities related to climate solutions, with a big focus on the energy transition,” Jenkinson continued.

The SISS portfolio is an opportunistic, structured portfolio investing across different risk-return spectrums, all the way from opportunistic infrastructure to venture capital.

Jenkinson divulged that some of the most interesting opportunities CalSTRS is seeing lie between the traditional infrastructure benchmark and the growth equity or venture capital benchmarks. This is where she argued that Generate Capital sits.

But is it infra?

CalSTRS sees a big difference between its classic infrastructure investments and the energy transition investments housed in its SISS strategy.

“On the infrastructure side, there are a ton of opportunities across the risk-return spectrum and we are actively looking at all [of them],” explained SISS portfolio manager Daniel Lau. Lau previously worked with CalSTRS’ infrastructure portfolio before moving on to SISS.

“But there are opportunities – whether they’re solar, wind, batteries, distributed generation – that some call [energy transition] ‘version 1.0,’ which are more traditional infrastructure [when compared] to the more nascent sectors of carbon capture, storage, biofuels and green hydrogen,” Lau explained. “Our objective is really to obtain strong relative value and strong risk-adjusted returns. That can present itself across any sector.”

When asked if some of these energy transition strategies may eventually derisk enough to fit into CALSTRS’ infrastructure portfolio, Jenkinson responded: “I wouldn’t answer it so much like that. I don’t like to speculate on where we’re going, but I think it’s more around the core goals of each of the pools of capital that we have. What is our traditional core infrastructure? I don’t see it as being ‘derisked’. I just see it as having a different risk-return profile with different opportunities.”

So, how should a GP market its energy transition fund to CalSTRS? It’s not cut-and-dry.

“I say this to managers when they come in: it’s helpful for them to listen to what we’re trying to do rather than to pitch us what they think is the strategy we want to hear. A true partnership and understanding of each other’s perspectives usually is a better place to start than coming in with a set of predetermined solutions,” said Jenkinson.

She continued: “We all have unique portfolios. Every asset owner has a unique approach to investing. Managers that we’ve found have been most successful are the ones that we could genuinely learn with together, but also listen together.”

The pension plan has also been seeking more co-investment opportunities to support this strategy.

“We have a broader strategy at CalSTRS, which we name our collaborative model,” explained Jenkinson. “That’s seen us move, in our private equity teams, more towards funds as well as co-investments, moving a little bit [towards a] more direct [investment model].”

She explained that all of the investments made via the SISS private portfolio have been very much aligned with this collaborative model.

“[This is] to give us a little bit more control and more of an ability to deploy capital at a pace that isn’t just through a fund structure,” she explained. “With the collaborative model you will see elements where we’re shifting our [investment] style – and we have been for a number of years – away from just being a pure fund investor to being more of what one would say might be more akin to what some of the Australian and Canadian funds have done.”